Towards Insolvency Law Reform: Learnings from Case Law

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1 Towards Insolvency Law Reform: Learnings from Case Law Presentation at BLRC Conference Aparna Ravi July 31, 2015

2 How does a Company in Distress go through the Legal System? Analysis of judgments on insolvency and insolvency related proceedings to assess: Where bottlenecks and inefficiencies in the process lie Principal causes of delays

3 Current Insolvency Regime Act Purpose Applies to Forum Act CA 1956 Purpose Applies SICA 1985 to Forum RDDBFI Act, 1993 SARFAESI Act, 2002 Liquidation/ winding up Rescue and rehabilitation Debt recovery Enforcement of security All corporates Industrial companies only Banks and financial institutions, debt of Rs 10 lakh or more Secured creditors High Court BIFR DRTs/DRATs Does not require court involvement (appeals to DRT)

4 Methodology Review of 45 High Court Judgments References from BIFR for liquidation Winding up petitions Appeals from BIFR or AAIFR decisions (interpretation of SICA) Appeals from DRT/DRAT (SARFAESI/RDDBFI Act)

5 Methodology Review of 15 DRT/ DRAT decisions Challenges to SARFAESI enforcement action Enforcement under RDDBFI Act Time Period from 2003 onwards (post enactment of SARFAESI) Judgments chosen on the basis of variations in number of creditors, debt structure, large and small companies and from different HCs and DRTs/DRATs

6 Learnings from Case Law Numerous instances of parallel proceedings initiated by different parties and in different fora: Debtor makes reference to BIFR, while creditor files winding up petition in HC Secured creditors seek to enforce under SARFAESI while BIFR is considering sickness One creditor initiates action under RDDBFI Act while another files winding up petition

7 BHEL v Arunachalam Sugar Mills Ltd., decided on (Madras HC) Secured Creditor 1 filed an application in the DRT for debt recovery Secured Creditor 2 filed a company petition for winding up Secured Creditor 3 entered into an MOU with Secured Creditor 1 to get paid upon Secured Creditor 1 s recovery Trade creditor that had leased machinery to the debtor initiated proceedings invoking the arbitration clause in the contract Secured creditor 4 initiated proceedings under SARFAESI and sold assets by auction Unsecured creditor that had supplied a boiler to the debtor filed for debt recovery in the civil court

8 Has resulted in.

9 Little Clarity for Creditors on Overall Position of Debtor Kritika Rubber Industries v. Canara Bank (Karnataka HC, ) Parallel proceedings initiated by two groups of creditors in DRT and HC. DRT ordered attachment of secured property and sale in auction, while HC appointed an OL to wind up the company. OL got sale in auction set aside Secured creditors claimed to have no knowledge of winding up petition (filed in 1999) until they received notice of OL s action to set aside the sale authorised by the DRT (2008)

10 Conflicts between Laws and Over Jurisdictions Can sale be made under SARFAESI Act without leave of company court once winding up proceedings have commenced? Indian Bank v. Sub-Registrar (HC of AP and Telangana, decided on ) Yes BHEL v. Arunachalam Sugar Mills (Madras HC, decided on ) No, need consent of OL Krithika Rubber Industries v. Canara Bank (Karnataka HC, decided on ) DRT cannot order sale without consent of OL

11 Conflicts between Laws and Jurisdiction Can secured creditors initiate proceedings under SARFAESI while proceedings under the RDDBFI Act were pending? M/S Digivision Electronics Ltd. v. Indian Bank (Madras HC, decided on July 7, 2005) No, need leave of DRT Bank of India v. Ajay Finsec Pvt Ltd and Ors (OA No. 167 of 2001, decided on ) DRT ruled that banks could proceed with enforcement under SARFAESI while RDDBFI proceedings were pending M/S Punea Cold Storage v. State Bank of India (AIR 2013 Part I; II (2013) BC 501 Patna HC) - Cannot initiate proceedings under RDDBFI Act if SARFAESI enforcement action had begun

12 Time Periods High Court Cases Time Taken No. Of Cases Comments/ Breakdown 0 2 years 8 Winding up petitions 4 (3 involved FCCB holders) SARFAESI/RDDBFI years 10 Appeals from BIFR/AAIFR 5 SARFAESI/RDDBFI years 7 References from BIFR 2 Winding up Petition 1 Appeal from BIFR 1 SARFAESI/RDDBFI years 17 References from BIFR 8 Winding up petitions 3 Appeals from BIFR 3 SARFAESI/RDDBFI 3

13 Time Periods DRT/DRAT Time Taken No. of Cases Time Taken/Breakdown 0 2 years years years 5 1 case took 6 years in DRT but 17 in total 10+ years 2

14 Reasons for Delays Pro-rehabilitation stance of courts Line of Supreme Court precedents that former directors can explore rehabilitation after issuance of winding up order Deference to BIFR s jurisdiction despite the process being dysfunctional Winding up order does not signal the end Years between passing of winding up order and completion of liquidation Debtors often file applications to stay winding up orders

15 SARFAESI Enforcement Actions Overriding effect of SARFAESI often upheld in courts, but of 45 HC cases and 5 of 15 DRT/DRAT cases reviewed involved applications by debtors to stay SARFAESI actions: Civil courts have issued interim stays on SARFAESI proceedings (overturned by HCs) DRTs/DRATs have gone on to determine quantum of liability or set conditions on SARFAESI enforcement when considering efficacy of SARFAESI action HCs have issued stay on SARFAESI proceedings or determine that others laws get precedence

16 Learnings Multi-layered framework is a significant contributor to the delays and bottlenecks in the insolvency process Delays also caused by poor understanding of the law, pro-rehabilitation stance of courts and huge delays between winding up order and liquidation Is it the law or its implementation?